Securing sound public finances and structural reform are the major challenges for the Member States in the euro area. The European Commission calls on leaders in the euro area to face these challenges provided by economic growth in the euro area in order to overcome these challenges. In today's globalised world, the euro area should also play a more prominent role on the international stage.

ACT

Communication from the Commission to the Council, the European Parliament, the European Economic and Social Committee, the Committee of the Regions

and the European Central Bank of 3 May 2007: Annual Statement on the Euro Area 2007 [COM(2007) 231 final - Not published in the Official Journal].

SUMMARY

In this Communication, the European Commission presents its views on how euro-area countries can face up to their shared responsibilities and challenges. The document, which is accompanied by the annual report on the euro area [PDF], is designed to inform the debate on the euro-area's economic performance and the functioning of Economic and Monetary Union (EMU).

A tangible symbol of European construction: the euro

Economic integration is central to the success of the European construction, as the Heads of State and Government reaffirmed on the 50th anniversary of the Treaty of Rome in 2007, in the Berlin declaration: "The common market and the euro make us strong". The single currency is indeed a tangible symbol of the European construction. Spurred on by the successful introduction of the euro in Slovenia on 1 January 2007, other Member States are stepping up their preparations to enter the euro area once they meet the convergence criteria. On 16 May 2007 the Commission confirmed that Cyprus and Malta meet the criteria and can therefore introduce the euro on 1 January 2008, subject to the Council of Ministers adopting a decision to that effect.

The European Council stresses the need for prudent fiscal policies

As part of the Lisbon Strategy, the 2007 Spring European Council adopted a number of specific recommendations for the euro area, emphasising the need for prudent fiscal policies and improvements in the quality of public finances and calling for greater adaptability in the markets for goods and services. The Heads of State and Government are also calling for better alignment of wage and productivity developments and an accelerated pace of financial-market integration.

Creating a solid base for economic recovery

The euro area grew by 2.7 % in 2006, its fastest growth rate since 2000. Employment growth was around 1.5 % in 2006, meaning that close to two million new jobs were created. In December 2006 the unemployment rate was 7.5 %, its lowest level in 15 years. Inflation was around 2 % last year, but it came down towards the end of the year as energy prices eased. The European Commission sees the prospects for economic growth in the euro area as being more favourable in 2007 than they have been for many years.

Although there are signs of greater resilience to global disturbances, the Commission points out that unforeseen events on the geo-political stage or exchange-rate tensions are among the factors which could lead to lower-than-expected growth.

If the euro area's economic recovery is to continue, macroeconomic policy must be given a sound footing. In this context the Commission calls on the Member States to take advantage of the economic upswing to complete the consolidation of their budgetary situation by the end of the decade. Such fiscal consolidation would also enhance the overall macroeconomic policy mix, and securing sound public finances would help the euro-area members to address the economic implications of their ageing populations.

The Commission recognises that euro-area members have made an effort to correct their excessive budget deficits. In January 2007 the Council closed the excessive-deficit procedure against France, and on 16 May 2007 it recommended to the Council that the current excessive-deficit procedures against Germany and Greece should be terminated. The same applies to Malta, which is seeking to introduce the euro on 1 January 2008. However, the Commission points out that the Member States, especially those in the process of correcting their excessive deficits, must press ahead with budgetary consolidation to meet their medium-term budgetary objectives.

The euro-area countries must sow the seeds of further structural reform, stresses the Commission. The Lisbon economic reform agenda is critical for boosting growth and jobs in the 27 Member States but has an added dimension for the euro area. Economic reforms will reduce inflationary bottlenecks in the euro area and help to sustain economic recovery. In addition, well-functioning product, labour and capital markets are essential for dealing with economic shocks. However, the slow adjustment of some euro-area members to country-specific shocks shows that the economic reforms need to go further.

Adapting the single market to the 21st century and delivering greater benefits for citizens

All the Member States must ensure that the internal market is equipped to meet the opportunities and challenges of the 21st century. A dynamic internal market could encourage a closer alignment of national economic cycles and speed up the adjustment of prices and wages to economic shocks. When the Single European Act entered into force 20 years ago, a fairly homogenous European economy was strongly reliant on the mass manufacture of standardised products. In today's world of globalisation, new technologies and EU enlargement, the economy has a greater degree of product differentiation and is more and more reliant on the knowledge-based and service sectors.

In its Communication "A single market for citizens" [COM(2007) 60 final], the Commission recommends that the single market should be adapted to new realities. It stresses the need to deliver even more tangible benefits for European citizens, entrepreneurs, workers and consumers. To achieve this, the single market must do more than take measures to overcome cross-border legal obstacles for businesses. The Commission will present a complete assessment of the single market with concrete proposals for action towards the end of 2007.

A more prominent role on the international stage in today's globalised world

The euro area is part of an increasingly interdependent global economy. Over the year, the euro appreciated by around 11 % against the US dollar and around 12.5 % against the Japanese yen. However, in real terms the euro appreciated by much less (+3.5 %). The trends observed in 2006 continued in the early months of 2007.

The existence of global imbalances is a matter of concern for the world's economy. The International Monetary Fund (IMF) organised multilateral consultations on global imbalances in which the euro area played an active role along with the other major economic powers. The participants agreed on the following action:

increased national saving in the USA with measures to reduce the budget deficit and promote private saving;

further structural reforms in Japan, in particular the consolidation of public finances;

greater exchange-rate flexibility in a number of emerging economies in Asia with surpluses (in particular China);

Communication from the Commission to the Council, the European Parliament, the European Economic and Social Committee, the Committee of the Regions and the European Central Bank: Annual Statement on the Euro Area 2006 [COM(2006) 392 final - Not published in the Official Journal].

In its 2006 annual statement, the Commission lists the main challenges facing the euro area, as follows:

budgetary consolidation;

structural reforms to increase productivity and promote growth and employment;

deepening the internal market to reap all the benefits of the single currency and respond rapidly to economic change.

In the external domain, the growing importance of the euro as a global currency and the challenges facing the world economy call for a more prominent role for the euro area on international economic and financial issues.